Tag Archives: money

Policy pickles redux

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History repeats itself, with variations; as the famous Reinhart and Rogoff book on sovereign debt crises argues, [amazon_link id=”0691152640″ target=”_blank” ]This Time is Different[/amazon_link] – not! I’ve just been reading a fascinating book by Bill Allen on UK macro policy history, [amazon_link id=”113738381X” target=”_blank” ]Monetary Policy and Financial Repression in Britain, 1951-59[/amazon_link]. The 1950s were preceded by a period remarkably like today’s context in important ways. The Bank rate – the key policy rate of the period – had been kept at 2% for nearly two decades, to combat the Depression, finance the war, and keep the economy growing in the post-war years. With a new government in 1951, monetary policy was ‘reactivated’.

[amazon_image id=”113738381X” link=”true” target=”_blank” size=”medium” ]Monetary Policy and Financial Repression in Britain, 1951 – 59 (Palgrave Studies in Economic History Series)[/amazon_image]

The author – formerly a senior Bank of England director and now at Cass Business School – argues that the 1950s have highly relevant lessons for today. The Bank’s key rate has been at 0.5% for more than five years and will stay there for some time longer. With short-term government debt outstanding amounting to £342bn at the time he wrote (just over 20% of GDP), “This means that any increase in short-term interest rates would entail an immediate and substantial increase in government expenditure.” Yet, he continues, it is inconceivable that interest rates can stay so low for ever. The only way is up.

What possible paths are there out of this situation? Either higher interest rates will lead to a big increase in the fiscal deficit or (much) more austerity; or nominal GDP will have to rise substantially either via real growth or higher inflation to reduce the fiscal impact of higher interest rates; or banks will have to be forced to bear some of the cost of rising interest rates – as in the 1950s – by a requirement to hold very large non-interest bearing deposits at the Bank of England. The first option is unappealing, the second unlikely given present economic trends. “One fine day there will have to be a new reactivation of monetary policy, and the authorities will have to manage exactly the same problem that faced their predecessors.”

There are of course some very important differences between now and the 1950s, including the fact that the amount of private debt outstanding now is so much greater (141% of GDP vs 16% of GDP in 1951, the much lower liquidity ratios of banks now). Still, the parallels make this history extremely interesting. The bulk of the book consists of a chronological account of monetary policy and description of the techniques used and decisions made over the decade. The final chapters cover four themes: monetary policy tools, financial repression, power and influence, and an overall assessment of the monetary policy chosen.

The power and influence chapter is especially interesting. This was long before Bank of England independence so the Chancellor of the Exchequer took the policy decisions and was in principle answerable to the House of Commons. In practice, secrecy prevailed, and there was almost no communication about policy – quite a contrast to today’s situation of ample, and perhaps even excessive to the point of confusion, communication. The book places the blame for the prevailing secrecy on the dire state of Britain’s financial problems both in the 1930s and again after the war. “Formal post-war default by the UK would have been technically possible but politically poisonous.” Commentators on policy had to apply guesswork to figure out what the Bank of England had already done, never mind what its future actions might be – the book uses archive material to fill in the blanks.

One result was that academic discussions diverged from practice, a damaging divorce. For those who understood the institutional reality of money and those who developed theories about monetary policy on the whole stopped speaking to each other – something we arguably paid the price for in the recent crisis, by which time the non-institutionally grounded theories had reversed themselves into central bank thinking too. (I find the institutional detail explained in this book far more interesting than the abstractions of macroeconomic models, I must say. It brought back to me memories of reading parts of the Radcliffe Committee Report in my undergraduate days, and being intrigued by the practicalities of monetary policy – an interest thoroughly destroyed by subsequent exposure to real business cycle theories and representative agent models.)

My sole criticism of this fascinating account of the reality of a decisive decade in UK monetary history is that it’s priced for institutional libraries (£70); but anybody at all interested in how we might find a way out of the present policy pickle would do well to borrow a copy.

Money as a process, not a thing

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Nigel Dodd’s [amazon_link id=”0691141428″ target=”_blank” ]The Social Life of Money[/amazon_link] is fascinating. I’ve never understood money and don’t think I do yet. One of the signs of its abstraction as a concept is the way people bring their own interpretations to it, perfectly plausibly.

[amazon_image id=”0691141428″ link=”true” target=”_blank” size=”medium” ]The Social Life of Money[/amazon_image]

In my first ever job, in the Treasury in the mid-1980s, I had the task of looking at the properties of different linear combinations of deposits, all corresponding to different definitions of money – not that I over-thought it at the time. Economics textbooks over the years have blithely carried a completely fictional, institution-free account of the money multiplier, and give us probably the least plausible explanation, typically – and unhistorically – claiming money emerged from barter trade.

Information scientist Jaron Lanier’s book [amazon_link id=”0241957214″ target=”_blank” ]Who Owns The Future[/amazon_link], which I’m currently reading, says, “Money is simply another information system.” Digital identity and currency guru Dave Birch tells us [amazon_link id=”1907994122″ target=”_blank” ]Identity is the New Money[/amazon_link]. This echoes Keith Hart in his classic [amazon_link id=”1861972083″ target=”_blank” ]The Memory Bank[/amazon_link]: “The two great memory banks are language and money. Exchange of meanings through language and of objects through money are now converging in a single network of communication, the internet.” Another anthropologist David Graeber in his tome [amazon_link id=”1612191290″ target=”_blank” ]Debt: The First 5000 Years[/amazon_link] rooted money in group cultures. Nigel Dodd is a sociologist so he gives us the sociological perspective.

[amazon_image id=”1861972083″ link=”true” target=”_blank” size=”medium” ]The Memory Bank: Money in an Unequal World[/amazon_image]  [amazon_image id=”1612191290″ link=”true” target=”_blank” size=”medium” ]Debt: The First 5,000 Years[/amazon_image]  [amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity Is the New Money (Perspectives)[/amazon_image]  [amazon_image id=”0241957214″ link=”true” target=”_blank” size=”medium” ]Who Owns The Future?[/amazon_image]

Dodd’s book starts by looking at the various origin myths and links each to current (sociological) monetary theories. It then takes money by theme: capital, debt, guilt, waste, territory, culture and utopia. The chapter covering the terrain most familiar to economists is that on debt, but it takes an entirely different perspective, with Keynes and Minsky the principal economists named here. The chapter’s conclusion gives its flavour: “A monetary system that i defined by an over-arching orientation toward the interest of creditors is inimical to democracy. …. Democracy, or society, now appears to be in open conflict with the needs of finance. Debt is no longer facilitating capitalism, it is driving it.”

In a way, I found this book very heavy going because it is written in the language of sociology, and with lots of references unfamiliar to me. But it’s good for any of us to look through the lens of a different discipline. I find Dodd’s conclusion persuasive – that money is not a thing but a social process. This tallies with Dave Birch’s argument that the combination of ubiquitous mobiles and their record of a dense social graph means digital identity is fast becoming the latest manifestation of money.

Dodd also presents the paradox that money is both outside the realm of values it describes, as the means of measurement, and inside it as a particular commodity with a value – he quotes [amazon_link id=”0415610117″ target=”_blank” ]Georg Simmel[/amazon_link] as saying money is both the measure and measured. And he links this self-referential character to the capacity for financial bubbles and crises to inflate themselves. True value lies in the social life of money, in the activities of human societies.

[amazon_image id=”B0092JLXJW” link=”true” target=”_blank” size=”medium” ]ThePhilosophy of Money by Simmel, Georg ( Author ) ON Apr-01-2011, Paperback[/amazon_image]

What this means for monetary policy is another matter entirely, and Nigel Dodd’s forays into economics are far less persuasive – not that there seems to be a more compelling approach to money on offer from the macroeconomists either at the moment. Sticking a bit of ‘institutional’ friction into DSGE models to represent the banking and shadow banking sectors can only be a sticking plaster until monetary economists start to take seriously the insights to be drawn from sociologists and others.

Virtual serendipity

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Serendipitously, the day after writing about [amazon_link id=”0262027259″ target=”_blank” ]Virtual Economies[/amazon_link] by Vili Lehdonvirta and Edward Castronova, another new book by Edward Castronova arrived in the post, [amazon_link id=”B00KMUWRXG” target=”_blank” ]Wildcat Currency: How the Virtual Money Revolution is Transforming the Economy[/amazon_link]. It’s about the convergence of the ‘real’ and the virtual in the domain of money, although of course as money is already largely virtual, this is more about the crowding out of the previously public domain of money by private currencies: “Today anybody can be a central bank.” On a quick glance through, [amazon_link id=”B00KMUWRXG” target=”_blank” ]Wildcat Currency[/amazon_link] looks like an accessible overview of the territory.

[amazon_image id=”B00KMUWRXG” link=”true” target=”_blank” size=”medium” ]Wildcat Currency[/amazon_image]

This is a hot subject of course. In which context , it would be remiss of me not to highlight another excellent recent book about the future of money, Dave Birch’s [amazon_link id=”1907994122″ target=”_blank” ]Identity is the New Money[/amazon_link].

[amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity is the New Money (Perspectives)[/amazon_image]

Technology, identity and money

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It would be bad form to review Dave Birch’s excellent new book [amazon_link id=”1907994122″ target=”_blank” ]Identity is the New Money[/amazon_link] here, given that I commissioned him to write it. To entice readers, however, here is his argument in a nutshell: “This book argues that not only is identity changing profoundly but that money is changing equally profoundly, because of technological change; and that the two trends are converging so that all we will need for transacting will be our identities.” It’s thought-provoking, informative and entertaining. Anyone interested in any of money, social networks and/or mobiles should read it – after all, there are few experts who know as much as Dave about the overlap between digital technology and money.

[amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity is the New Money (Perspectives)[/amazon_image]

Trail over, I was interested to read this article by Paul Laity about Penguin’s revival of the Pelican imprint, its series of accessible, reasonably short non-fiction books on a wide range of subjects of contemporary interest. Sound familiar? Our Perspectives series got there a year ago, albeit sadly without Penguin’s marketing budget. Still, I agree with their sense that the ‘thirsty public’ is back – even though non-fiction book sales have apparently been declining. Surely [amazon_link id=”067443000X” target=”_blank” ]the Piketty phenomenon[/amazon_link], if nothing else, will reverse that in 2014’s figures?

One of the first Pelican titles will be Ha Joon Chang’s [amazon_link id=”0718197038″ target=”_blank” ]Economics: A User’s Guide[/amazon_link]. I found the style of his [amazon_link id=”0141047976″ target=”_blank” ]23 Things They Don’t Tell You About Capitalism[/amazon_link] irritating but it was nevertheless well worth reading. I’m sure the new one will be equally valuable.

[amazon_image id=”0718197038″ link=”true” target=”_blank” size=”medium” ]Economics: The User’s Guide: A Pelican Introduction (Pelican Books)[/amazon_image]

Money and me – and you

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It’s an exciting moment – the advance copies of Dave Birch’s book, [amazon_link id=”1907994122″ target=”_blank” ]Identity is the New Money[/amazon_link], have arrived here at Enlightenment Economics Towers.

OK, as series editor, I’m biased, but this is an exciting book. Dave’s one-man expertise on the technological issues involved in both identity security and digital money have converged in an absolutely illuminating and highly entertaining read. He argues that there is no trade-off between our financial/data security and our privacy; the marriage of mobiles and social networks means we can have both. As the infrastructure is put in place, cash use will evaporate – and a good thing too, in his view.

[amazon_link id=”1907994122″ target=”_blank” ]It’s available for pre-order on Amazon[/amazon_link] and will be shipping soon!